Employees are defined based on common law or by statute.
Under operation of law, some workers are considered employees
while others, non-employees.
Under common law, a person who performs services for you is your
employee if you can tell them what to do and how to do it. The most important
concept is that you, the employee, control the details of how the services are
performed. In most cases, people in business for themselves aren't employees
and as a result they file a Schedule C tax return. Examples of taxpayers
in this category may include: doctors, accountants, architects, and other
professional trades that offer their services to the public are usually not
employees. Like non-owner workers, owner-employees are considered employees of
the corporation. If an employer-employee relationship exists, those persons are
employees even if the employer calls them a contractor or an
agent.
Never withhold federal income
tax from a worker’s pay (unless backup withholding applies) if he or she isn't
an employee under the common law rules as discussed earlier. Under certain
conditions, the following parties are considered employees by statute for
social security and Medicare tax purposes:
• An agent or commission driver
who delivers meat, vegetable, fruit, or bakery products; beverages (other than
milk); laundry; or dry cleaning for someone else.
• A full-time captive life
insurance agent who sells products for one company.
• A homeworker who works at
home or off premises according to certain guidelines.
• Certain traveling or city
salesperson (other than an agent or commission driver) who works full time
(except for sideline sales activities) for one firm or person getting orders
from customers.
The following are considered
nonemployees by law: Direct sellers, qualified real estate agents, and certain
companion sitters are usually treated as self-employed for all federal tax
purposes.
Generally, if you fail to
deduct Social Security and Medicare taxes for an employee, you’ll be deemed
liable for any those taxes. Special rates under section 3509, which are
dependent on whether you filed form 1099, can be used to determine your
liability for the employee share of social security and Medicare taxes and
federal income tax withholding. By using those special rates, you will not
recover the employee share of above-mentioned withholding from the employee.
You’re liable for the income tax withholding even if the employee paid income
tax on the wages and will also owe the full employer share of social security
and Medicare taxes. In this scenario, the employee remains liable for his share
of social security and Medicare taxes. Section 3509 isn't available for reclassifying
statutory employees.
You may be relieved from
employment tax liability if you can show reasonable cause for treating a worker
as a nonemployee. To get this relief, you must be compliant with all tax filing
requirements. Using the IRS’s Voluntary Compliance Settlement Program (VCSP),
employers who are improperly classifying employees as nonemployees may opt to
voluntarily reclassify their workers as employees for future tax periods. By
doing so, the employer may save on interest and penalties.
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